Vietnamese dong caught between rising dollar, falling yuan

Vietnam’s central bank has to engage in a delicate balancing act as the US-China trade war exerts inflationary pressures on the dong.

Containers are seen at the Yangshan Deep Water Port in Shanghai, China April 24, 2018. Photo by Reuters/Aly Songgy.0

As the trade war of duties and counter duties escalates, China has weakened its currency to boost exports making its goods even cheaper in Vietnam.

Local economists have noted that while the yuan has lost 4.18% against the US dollar over the last two weeks, the Vietnamese dong has only lost a little above 1%, making Chinese imports much cheaper.

Vietnam has to balance between keeping the trade deficit control and being able to compete with cheaper Chinese goods in the market.

In the past three months, the yuan has fallen 3% against the dollar while Vietnam only devalued dong around 1.1%.

And Vietnam should take precautions because the yuan could fall even further, financial expert Nguyen Tri Hieu said.

“China has set the yuan’s foreign exchange rate at 6.95 per dollar,” he said. “But around two years ago, that number was even lower at 6.69 per dollar. So there is a potential for the yuan to slip further.”

Hieu said he believes that if the government decides to devalue the dollar, a three percent drop by the end of this year is reasonable.

Economist Ngo Tri Long, former director of the Market Price Research Institute under the Ministry of Finance, cautioned that that the central bank should adjust the dong’s exchange rate based on the market and not the yuan.

“In my opinion, adjusting the dong’s value at the moment is a risky move, especially, with a 3% drop.

“It is going to be hard to achieve the nation’s target of keeping inflation below 4% by the end of this year. Not to mention other future-factors we should take into consideration other factors like higher oil prices and damage caused by natural disasters.”

But if Vietnam decides to move forward with devaluing the dong decision, the adjustments should be based on market demand and not on the yuan’s value. Long felt that a two percent drop would better match current market.

On the other hand, president of Vietnam Institute for Economic and Policy Research Nguyen Duc Thanh stated that Vietnam should reduce dong’s currency exchange rate against the dollar and the yuan.

However, such a move it would greatly affect many businesses, Thanh said.

“This is a risky step since it will have ripple effects on many sectors like stocks and real-estate.”